Question

In: Economics

Consider a public policy aimed at reducing smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.8.


Consider a public policy aimed at reducing smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.8. 

a. If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 20%, how much should it increase the price of a pack of cigarettes by? 

b. If the price increase is permanent, will the effect on smoking be greater in 3 months or 3 years? Why?

Solutions

Expert Solution

a) E = 0.8

Since the government wants to reduce smoking by 20%, it should increase the price by:-

0.8 = 20/change in price

Change in price = 20/0.8 = 25%

so, it should increase the price by 25%

b) The effect on smoking will be greater in 3 years since the price elasticity of demand is inelastic in the short run and elastic in the long run.

Rahul Sunny answered 2 years ago
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